Banks and startups in the Nordic region are working together to develop new ideas in financial technology

First they were deemed a threat, now they are potential partners. According to a new report by Nordic accelerator Fintech Mundi, banks are increasingly turning to financial technology (fintech) startups in their hunt for new ideas and market opportunities.

Nordic markets are already home to a number of unicorns – fintech startups valued at more than $1bn.

Susanne Hannestad, CEO at Fintech Mundi, said: “This fact is reflected in the confidence of our survey respondents, and in the growing evidence of partnership between financial institutions and fintechs.”

The report, Innovation. Distributed: The Fintech Disruptors Report 2017, was sponsored by Norway’s biggest bank, DNB. It found that 74% of Nordic banks intend to collaborate with fintech companies in 2017, which is a major jump from 2016, when less than half had a defined fintech strategy. This trend is reflected elsewhere in Europe, where 78% of banks have similar plans.

Peder af Ugglas, Nordea’s head of partnership development, is not surprised by the findings. He cites various drivers behind the change, including new regulation, collaboration starting to make business sense for both sides, and fintechs’ increased focus on customer numbers and revenue.

“Today, both banks and fintechs are looking for win-win collaborations,” said Ugglas. “It’s a positive change from previous years, when banks and fintechs were often depicted as fierce rivals with an ‘only one can remain, fight to the death’ approach. Collaboration is the only way forward. This realisation is not new, it’s just more transparent now than before.”

As well as seeking new partnerships, many Nordic financial institutions (42%) plan to expand their existing startup partnerships or set up fintech incubators (42%). It is this latter figure that makes the Nordics stands out because it is almost double the interest shown by banks in the rest of Europe (24%).

Examples are easy to find. In addition to the growing number of individual partnerships, Fintech Mundi reports that six fintech accelerators have launched in the Nordics over the past 18 months, alongside incubator programmes and fintech hubs that are aimed at bringing all parts of the financial sector together.

And banks have jumped at the opportunity. The Nordics’ largest financial services group, Nordea, has moved some of its digital staff to Denmark’s Copenhagen Fintech Hub and Sweden’s Stockholm Fintech Hub to develop closer ties with the startup scene.

Similarly, in Norway, DNB has thrown its weight behind the DNB NXT Accelerator programme run by the Norwegian Startup Lab, and Finland’s biggest financial services group, OP, has started its own OP Lab programme for startups.

Denmark’s Danske Bank has taken a slightly different approach. It has developed The Hub, an online platform that works with local partners in each of the Nordic countries to help startups with recruitment and raising capital.

“The main focus has been to engage not only with fintechs, but with tech startups across the Nordics,” said Klavs Hjort, head of business innovation at Danske Bank, “and to approach these companies as potential customers rather than seeing them as potential partners for us first. Of course, one of the benefits is that about 20% of startups within The Hub are fintechs, so it can be leveraged to form partnerships afterwards in an open banking context.”

Collision of cultures

While Nordic banks have a long history of collaboration, this has not always been the case in terms of working with startups. In fact, Hannestad suggested Nordic banks were at first arrogant in their approach, but this changed as they have seen global banks such as Barclays and Santander launch fintech initiatives.

Today the benefits of collaboration are recognised on both sides. Incumbent banks turn to startups to find new revenue streams, reduce costs and enhance the customer experience, while startups gain access to banks’ data, large user bases and regulatory expertise on issues such as money laundering.

Fintech Mundi reports that Nordic fintechs are embracing this model. Its survey found that 62% see partnerships as a way to build customer trust, compared with an average of 48% across Europe.

But despite such good intentions, working together is no guarantee of a smooth ride. Startups are used to moving quickly, but established financial institutions follow strict processes. Also, legacy IT systems are still a reality for many banks, which can cause costly integration problems with new technologies.

“Getting collaboration and communication right is one big challenge,” said Halvor Lande, head of digitalisation at DNB. “Startups first see us as slow moving, which in many ways is true, but it is also for some good reasons, such as security, compliance and the fact that we are 10,000 people, so we need to have a bit of internal co-ordination and alignment to be consistent and reliable in our partnership discussions.”

The banks widely recognise that this is an issue. In the Fintech Mundi report, 63% of the Nordic banks surveyed saw “creating a culture of innovation” as a major challenge, compared with 57% for Europe as a whole.

Towards modularised banking

What the Nordic financial industry expects to see next is more consolidation, either through mergers with other fintechs or acquisitions by banks. In Fintech Mundi’s report, the key themes for the Nordics looking ahead to 2020 were named as fintech mergers and acquisitions, fintechs providing services to banks, and the emergence of new banking business models (all 36%).

“Partnerships will grow in importance since the market is likely to consolidate, meaning there will be tough times ahead for slow and reactive banks, as well as for fintechs not having their house in order,” said Ugglas.

One major driver already speeding up fintech collaboration is the EU’s revised payments directive, PSD2. This comes into effect in 2018 and requires banks to open up their data and application programming interfaces (APIs) to third-party service providers.

The directive will create new opportunities, not only for fintechs but for big tech companies, such as Google and Facebook, as banks are forced to rethink their API strategies. DNB’s Lande thinks some banks will turn into major infrastructure platforms with scalable and efficient systems for providing basic banking services, while others will emerge as specialists or evolve outside the traditional banking realm.

“I think the banking industry will look very different 10 years from now,” said Lande. “The end result will be a lot of new platforms and new kinds of players evolving into an increasingly complex ecosystem where we get different niche players proving specific features in a very effective way. Banking is going to become a much more modularised business.”

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